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2022 (11) TMI 960 - AT - Income TaxTP Adjustment - Comparable selection - determination of Arm’s Length Price (ALP) in respect of an international transaction of rendering Software Development Services (SWD services) by the assessee to its Associated Enterprises ("AEs") - HELD THAT:- Selection of companies as functionally similar with that of assessee confirmed. Computation of interest on delayed receivables - non-charging or undercharging of interest on the excess period of credit allowed to the AE - HELD THAT:- Adopting the rate of LIBOR at 6 months + 400 basis points adopted by the TPO is without any basis. The rate should be adopted after a proper benchmarking analysis. Interest computation if at all should be based on the delay of individual invoices, which has not been done. Whether delayed realization of trade receivables from the AE constitutes an international transaction or not? - Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd [2015 (7) TMI 473 - ITAT DELHI] wherein the Tribunal laid down guidelines on the manner of determination of ALP. The issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down after affording assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open. Nature of expenses - Disallowance of software expenditure by treating it as capital in nature - AO and the DRP held that the software expenses claimed by the assessee was capital expenditure and cannot be allowed as deduction - HELD THAT:- The period of license cannot be the basis to decide whether the expenditure is capital or revenue expenditure. The test to be applied is as to whether the expenditure was incurred to facilitate conduct of business more efficiently in its operation and not in the capital field. The assessee renders software development services and therefore the use of these software was in its operations and not in the capital field and in that view of the matter, we are of the view that the expenditure in question deserves to be allowed in full. The addition sustained is therefore directed to be deleted and the expenditure in question should be allowed as deduction as the expenditure is revenue expenditure allowable as deduction. Appeal by the assessee is partly allowed.
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